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Index funds are the type of mutual funds which invests in stocks of a market index. The composition of the portfolio is exactly the replica of an index in term of weight age and stocks. Hence, the return from index funds will be in the same line of the index. In this post, we look at various options on how to invest in Index Funds in India.

Features of Index Funds

Passive Investment– Index funds are passively managed funds meaning the fund manager has little role in the management of the fund and the role is limited to tracking of the composition of the fund.

Diversified Fund– As index funds capture the broad market exposure of an index. The fund portfolio represents the top companies by the market capitalization in different sectors.

Low Fees– Passive management feature of the fund helps in reducing the management fees and other overhead cost resulting in less expense ratio of the fund

Tracking error– The index funds are subject to tracking error. It means how much the return on the fund is deviating from the return of an index. It happens because of changes in constituents of the index, inflow/ outflow of funds etc.

Analysis of Index Funds

Analysis of index funds doesn’t require deep digging of the fund’s performance or portfolio composition. But there are few factors which affect the performance of the fund that should be looked upon for determination of the future performance of fund following points should be checked.

Sector weight age: It is important to know which sector has maximum influence on the fund and to what extent it is going to effect it. We should calculate the contribution of each sector of the fund by multiplying the sector weight by the sector return

Expense ratio: We should check for expense ratio for the fund. Index fund being passively managed should not have high expense ratio. Generally, it should be less than 1%

How the fund has performed over long term

We should check the tracking error of the fund. Tracking error means the difference between a portfolio’s returns and the index. High tracking error means the fund is deviating from its portfolio and should be avoided

How to invest in Index Funds

There are multiple ways, an investor can opt for investing in Index Funds

Agents

Online Portals

Demat Account

AMC Website

Online Portals: With the advent of Robo-advisors like Bodhik, investment in mutual funds are more efficient and focussed towards achieving financial goals more effectively. It uses set of algorithms, data analysis in suggesting the right fund to investors. Some pros and cons of Online portals are:

Pros

Low fees with high-quality investment service

Covers broader area of investment service

Ease of use with interactive platform

Cons

Less personalized service

Based on algorithm and data analysis, it offers passive investment advice

Agent: These are Independent financial advisor (IFA), helps an investor with managing financial goals, investment needs, recommends mutual funds and finally helps to buy them. Investing through IFA is ideal for investors who don’t have knowledge of financial planning. Some pros and cons of IFA are:

Pros

Effective recommendation on basis of investor profile

Personalised services

Cons

Doesn’t offer Direct funds

Charge commission from customer on managing their financial needs

High chances among adviser about inadequate information about products

Demat Account

One can invest in mutual funds through the Demat account also. Your online portal or an agent can open an demat account as well for your investments. Some pros and cons are:

One can invest in their pre-selected funds through official website of Asset management company. Pros and cons of investing directly through AMC are:

Pros

Access to direct plans of the funds

Convenient form of investing as it does not require paperwork and KYC is done digitally

Low cost

Cons

Have to visit different website for different AMC

Have to depend on self for selecting funds and formulating financial goals

Index funds in India

Index funds in India are present for very long time but are not popular among investors. One of the reasons being the availability of other good mutual funds with a better returns. One more factor which matters to an investor is, the fund manager cannot make adjustments to the portfolio during the bear phase in the market.

There are about 22 Index funds currently available to investors for both Nifty and Sensex linked. Few best performing index funds are: